The trade war is nearly over - long live the trade war

Donald Trump’s trade war is just one battle in a clash of values between the US and China

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  1. Garry White

Thankfully for investors, Donald Trump has linked stock market gains to his own performance. And he appears to be getting increasingly worried that, if an agreement isn’t reached soon, equity markets will tank. Of course, the civilizational clash will continue, but this “trade war” stage is doing too much damage on both sides of the divide. Evidence emerged this week that US consumers are literally paying for the policy – with those in Trump-voting areas the hardest hit. So, a “win” should be declared by both sides over the next few weeks.  However, this new cold war is far from over.

Two studies were released lastweek on the trade war’s impact on the US economy. Both make grim reading for the current White House – and it is clear that tariffs have been a failure on many fronts. One paper, written by economists from the New York Fed, Princeton and Columbia University, found foreign exporters haven’t moderated the impact of the tariffs by cutting prices. This means the entire cost of the tariffs fell on domestic US consumers and importers. It also found that US producers responded to reduced import competition by raising their own prices, further hitting Americans’ pockets.  The US domestic price of non-tariffed items was basically flat, but price rises in the US on tariffed goods rose between 10pc and 30pc. US exporters were also hurt by retaliatory tariffs, which were placed on about $121bn (£92bn) of US exports. The authors calculated that by the end of 2018, the cost of lost exports from the US was running at $2.4bn a month.

A separate paper, with authors including Yale University’s Pinelopi K Goldberg, currently chief economist at the World Bank, calculated that the annual economic loss from Trump’s tariffs was $68.8bn, or about 0.37% of US GDP. The protectionist measures helped some US companies too, due to import substitution and the ability to raise prices as competition from exports waned. Gains to some domestic producers from protective tariffs cut the overall loss to $6.4bn, or 0.03% of GDP. Of course, this is a tiny proportion of the US’s overall economic output, but the cost is being borne by American voters, not by China as Donald Trump promised. Tariffs are also mostly hitting Trump’s own base. “Workers in very Republican counties bore the brunt of the costs of [the] trade war,” the paper concluded. However, Democratic counties “ended up experiencing relative gains”.

This week’s trade deficit figures also demonstrated that President Trump’s current policy is failing.  Dubbing himself “tariff man”, he specifically said the aim of the trade barriers was to reduce the deficit, but data released this week showed that the US goods trade deficit surged to a record high last year. This was helped along by one of the Trump administration’s other policies, as his tax cuts helped boost domestic demand, sucking in imports, particularly vehicles. The Commerce Department said on Wednesday that a 12.4pc jump in December had contributed to the record $891.3bn goods trade shortfall last year. The overall trade deficit surged 12.5pc to $621.0bn, the largest since 2008.

China is hurting too. Beijing has set a target of GDP growth range of 6% to 6.5% this year, down from a hard target of 6.5% over the last two years. It blamed the trade war for this downgrade. “Instability and uncertainty are visibly increasing and externally-generated risks are on the rise,” Premier Li Keqiang said at this week’s China National People’s Congress in Beijing. “Downward pressure on the Chinese economy continues to increase, growth in consumption is slowing, and growth in effective investment lacks momentum.”

The trade imbalance between the two countries isn’t really the issue. It is about US hawks wanting to curb growing Chinese influence through its technological development programme such as Made in China 2025 and its Belt and Road Initiative (BRI), which aims to link China by sea and land with southeast and central Asia, the Middle East, Europe and Africa through an infrastructure network on the lines of the old Silk Road. It is about two superpowers with value systems that can never really be complementary battling for global influence. Washington wants to put an upstart Beijing in its place. However, tariffs are not how it will be achieved and his current tactics could hurt his chances of re-election.  

This battle will be fought in other arenas. We have already seen an increase in cyberattacks from China on US targets and the continued targeting of Huawei and other companies by the US government will continue. Huawei is now suing the US over a government ban on its products and China will continue to develop its own soft power elsewhere. News this week that the Italian government was negotiating a preliminary deal to become a part of China’s BRI is likely to have infuriated Washington. Reports suggested that aside from boosting trade and investment with Italy, President Xi aims to advance exchanges in areas such as science, technology and culture. This could drive US hawks to apoplexy.

However, for now, equity investors should feel reassured as an agreement on tariffs is looking more likely, despite the many complex battles ahead. The trade war is nearly over. Long live the trade war.

A version of this story appeared in Saturday’s Daily Telegraph.

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